Here’s the skinny on the new state budget’s fat incentive programs

This year’s budget goes big on economic development incentives. Forsaking previous General Assemblies’ libertarian hostility to targeted business investments, the state’s proposed spending plan creates a fat new program to land “transformative projects” (like a rumored Apple headquarters) and expands existing programs to provide more benefits to companies. Critics often deride these programs as ineffective, so the budget also opens the door for the Department of Commerce to assess the true economic impact of these programs at the county level after incentives are granted—an undeniably positive development.

The Latest Attempt to create a “Transformative Project” incentive program

The biggest move in the portion of the budget funding the Department of Commerce is the creation of a new “Transformative Project” category within the existing Job Development Investment Grant (JDIG) program. Rumored to come in response to a potential deal to land an Apple headquarters in the Triangle, this new JDIG program is broadly intended to support large-scale projects with thousands of jobs and significant private investment—the fourth such program in the last five years.

The problem is that this new program looks to be too generous in terms of what it gives to the company and too stingy in terms of how it benefits North Carolina:

  • Effectively eliminates the recipient’s corporate income tax liability for 30 years. The heart of the program allows companies to receive grants equal to 100 percent of their employees’ withholding taxes for 30 years, more than twice the normal JDIG grant period of 12 years.
  • Allows companies 10 years to ramp up, double the standard rate of 5 years. Recipients would now have an entire decade—rather than the current five years—before they have to show proof of job creation and investment to the Department of Commerce.
  • Makes it easier for companies to qualify as “transformative.” In the program’s current form, transformative projects would need to invest $4 billion and create 5,000 jobs to qualify. This year’s budget lowers these thresholds so that a company could qualify if it invests $1 billion and creates 3,000 jobs.

But the biggest problem with the “transformative project” program is that its definition of “transformation” isn’t terribly “transformative.” Like its three predecessors, this program defines a transformative project according to how many jobs it creates and how much private investment occurs. But as the Brookings Institution aptly puts it, genuine economic transformation is a long-term process that puts the state (or region) on a trajectory of higher growth, improves business productivity, and raises standards of living for everyone. A single firm, no matter how many jobs it creates, can’t really accomplish this by itself.

The true transformative impacts of a project come from the ways a company connects to the state’s existing network of suppliers, producers, available workforce, and the public investments that support them all. Regional economists have long understood that the biggest economic impacts occur when firms access, leverage, and then catalyze growth in the goods, services, and skilled labor produced by firms in related industry sectors.

For example, an aircraft engine manufacturer that promises to create 1,000 jobs will have a more transformative impact on the state’s economy than a poultry processing plant that promises to create 1,000 jobs. This is true not only because aircraft assembly pays higher wages (which will increase consumer spending more than a poultry plant), but also because it has stronger ripple effects across the economy. Building aircraft engines has requires parts and services that themselves require significant assembly and technical knowledge. In effect, aircraft assembly is more transformative than poultry processing because it leverages higher-value products and labor skills.

In other words, some firms are more transformative than others. But by relying solely on job creation and private investment as threshold conditions for eligibility, the current program may lead to giving significant public dollars away to projects that aren’t truly transformative.

Beyond the creating the new transformative project program, the budget also makes a few other changes, several which expand the amount of public collars going to these incentive efforts:

  • Increases the amount of the state can give to companies through the regular JDIG program each year from $20 million to $35 million.
  • Promotes JDIG investment in smaller, less populous counties by limiting the total amount of JDIG dollars that can go to counties with more than 500,000 people (Wake, Meck, Guilford) and setting aside $5 million for the 50 most distressed counties in the state.
  • Increases the amount the state can give away in film grants each year from $7 million to $9 million for a full-length movie and from $9 million to $12 million for a television season.
  • Prohibits JDIG awards from supporting employees with H1B visas. Companies receiving JDIG may still employee H1B visa-holders, but those positions are no longer eligible for JDIG dollars.

Lastly, the budget takes an important and positive step forward in assessing whether the state’s economic development programs are actually generating economic progress at the county level. The Department of Commerce is now required to report county-level performance across a range of development indicators (population, tax base, household income, among others) both in comparison to the overall state’s performance and over time.

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